Zynga Wins Arbitration Ruling on “Special Offer” Class Claims Based on Concepcion — Swift v. Zynga

[Post by Venkat Balasubramani with comments from Eric]

Swift v. Zynga, 2011 WL 3419499 (N.D. Cal.; August 4, 2011)

The US Supreme Court decided AT&T Mobility v. Concepcion earlier this year, and a question left open in that decision is how the Federal Arbitration Act’s preemption of state laws which disfavor arbitration clauses would play out in the online context. Most people thought that this decision would allow internet companies to push consumer claims into arbitration through provisions in relevant terms of use agreements, and a recent ruling involving Zynga seems to confirm this.

Background: Swift alleged that she accepted “special offers” while playing Zynga’s Facebook apps. She argued that the special offers were misleading, and sued Zynga as well as two of its advertising partners. The lawsuit was originally filed in late 2009 and amended in February 2010. Following the Supreme Court’s decision in Concepcion, Zynga moved to compel arbitration and to stay the litigation in light of the Supreme Court’s ruling.

Plaintiff received the allegedly misleading offers through Zynga’s “YoVille” app, which during the relevant time period contained the following arbitration provision:

You agree that any suit . . . arising out of or relating to these Terms of Use or any of the transactions contemplated herein or related to the Service or any contests or services thereon . . . shall be resolved solely by binding arbitration before a sole arbitrator under the rules and regulations of the American Arbitration Association (“AAA”); provided, however that notwithstanding the parties’ decision to resolve any and all disputes arising under these Terms of use through arbitration, Zynga may bring an action in any court of applicable jurisdiction to protect its intellectual property rights or to seek to obtain injunctive relief or other equitable [sic] from a court to enforce the provisions of these Terms of Use or to enforce the decision of the arbitrator. The arbitration will be held in San Francisco.

This agreement was silent as to whether the claims could be aggregated. The terms were presented to Swift when she first decided to start playing the game via a link under a button titled “allow access,” which provided notice that the application would access Swift’s Facebook profile information. Under the “allow access” button, the app presented the following text:

By proceeding, you are allowing YoVille to access your information and you are agreeing to the Facebook’ terms of service in your use of YoVille. By using YoVille, you also agree to the YoVille Terms of Service.

In August 2009 Zynga implemented a “Universal TOS,” which contained terms that were different from the YoVille Terms of Service. As relevant to the present dispute, these terms required arbitration on an individual basis, and excluded disputes relating to “theft, piracy, invasion of privacy” from their scope. [I’m not sure what Zynga’s rationale is for excluding privacy-related claims from the arbitration clause, but this could end up being relevant to the growing number of privacy lawsuits against Zynga.]

Discussion:

Was there a binding agreement requiring arbitration? Swift argued that she did not assent to the YoVille terms because the terms were not presented in a leakproof manner–i.e., she could access the application without affirmatively representing that she agreed to the terms. Swift relied on Specht v. Netscape and Hines v. Overstock for the proposition that “submerged” terms cannot be enforced by an online merchant. The court disagreed and held that Specht and Hines were distinguishable. In both cases, the consumer would have to hunt around to find the terms, whereas in this case, the terms were presented right underneath the button which allowed Swift to access the application. The court pointed to the fact that Swift did not affirmatively put forth any evidence that she did not read or agree to the terms. The court also pointed to Register v. Verio, where the Second Circuit enforced the online terms and rejected Specht’s implication that an “I agree” button was a prerequisite to enforcing online terms.

Did plaintiff’s claims fall within the arbitration clause? Swift argued that since claims involving “theft” were excluded from the arbitration clause, her claims were not subject to arbitration. The court doesn’t treat this argument very seriously, noting that the “complaint against Zynga cannot reasonably be construed as including a claim for “theft,” and therefore the complaint is not expressly exempted from the arbitration clause.”

Did Zynga waive the right to arbitrate its claims? Swift also argued that Zynga waived the right to arbitrate its claims, by never raising the issue of arbitration and litigating the case for over a year and a half before raising the issue of arbitration. She also pointed to a clause in the universal terms which said that if the bar on class arbitrations is found to be unenforceable, then the dispute will be litigated. She brought up a variety of arguments in support of this claim (e.g., Zynga acted inconsistently with its right to compel arbitration; she will be prejudiced) but the court rejects all of these arguments. Because Zynga could not have compelled arbitration pre-Concepcion, and since no court found the arbitration clause unenforceable–thus requiring the parties to proceed in court–nothing stops Zynga from seeking to compel arbitration based on Concepcion. In the court’s view, because:

Zynga acted promptly following the change in the law by ceasing litigation activity and moving to compel . . . it acted consistently with its rights.

Are the Universal Terms unenforceable because they are unconscionable? Plaintiff raised an unconscionability argument but seems to have pursued it in a lackluster manner. The court notes that “Plaintiff presented no evidence that might support [its procedural unconscionability argument].”

How about the third parties? The non-Zynga defendants tried to latch on to Zynga’s request to compel arbitration but they were not so lucky. They argued that the definition of “Zynga Parties” in the limitation of liability section of the terms was broad, and thus they should be able to invoke the arbitration clause. However, the arbitration clause did not mention “Zynga parties,” and the court concludes that the two sections have to be read separately. They also argued that as “agents” they should be entitled to enforce the arbitration clause, but the court sides with the plaintiff on this issue, noting that although initially plaintiff labeled these defendants as “agents” after conducting some discovery, she called them independent contractors. Finally, these defendants argued that they were third party beneficiaries. Citing to Balsam v. Tucows, the court rejects this argument as well.

The End Result: After concluding that Zynga is entitled to invoke the arbitration clause and the other defendants are not, the court nevertheless stays the lawsuit as to the non-Zynga defendants and orders the claims with respect to Zynga to be arbitrated. In response to the ruling, Swift decided to dismiss her claims with Zynga with prejudice so she could proceed against the non-Zynga defendants in court. This means Zynga is off the hook.

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To come back to the initial question, as a result of Concepcion, a lot of online disputes–particularly class actions–are going to end up in arbitration instead of the courts. Even if a dispute has been pending for awhile, a defendant who has the option available is going to push for arbitration. This makes me wonder whether online terms typically contain arbitration clauses which bar class claims or whether companies and their lawyers shied away from those terms in response to decisions which struck down arbitration clauses which barred class claims? Including a class action bar runs the risk of the entire agreement being invalidated, so you certainly can’t fault a company for not including this provision in online terms. Going forward, I wonder if online terms will become even more one-sided–since companies have greater assurances that arbitration clauses will be enforced, will this cause them to load up agreements with more onerous terms?

The argument over whether there was a meeting of the minds as to the online terms was interesting, but Zynga’s placement of the terms (in a location where plaintiff could not credibly claim she did not read them before she clicked “allow access”) made the “I didn’t read the terms of use” argument difficult to make. Nevertheless, I still like the idea of having a box that users check that says “by checking this box, I am saying that I have read and agree to the terms.” There’s a minor distinction between a user clicking “allow access” or installing the application and actually having to check a box saying he or she read and agreed to the terms. I like the insurance that the latter approach provides, but as this decision indicates, it’s not essential. Also, from the decision, it seemed that Swift did not access the app from her mobile device, but if she did, I wondered how this would affect the court’s analysis of whether she had imputed knowledge of and agreement to the terms.

Second, there is virtually no discussion in the order of how Zynga amended its terms to substitute the “Universal Terms” for the “YoVille Terms” which Swift initially agreed to. The court summarily notes that the initial terms contained provisions to the effect that Zynga “had the right to change the terms at any time” and “use after notice of [a] change in terms constitutes acceptance of the changes.” The court surprisingly does not delve into the issue of what notice Zynga attempted to provide Swift (if any) or any of the other circumstances behind the revisions of the terms (or the substitution of the Universal Terms for the YoVille Terms). As mentioned in this post about Roling v. E-Trade Securities, it’s pretty risky to include a provision in the agreement that says “we can amend this agreement any time and the revised version is effective after posting.” In this day and age, particularly where there may be some ability to message the end user or post messages that the end user will have a tough time arguing they did not read or see, there is no reason to play with fire with respect to this issue. I don’t know why companies continue to do it. (The agreement did say that it’s effective after “posting” which is better than nothing.)

Given the Court’s decision in Concepcion that laws which disfavor arbitration conflict with the Federal Arbitration Act, I wonder if the focus of disputes around the arbitrability of online terms will shift from substantive to procedural? Swift did not appear to make much of an argument as to procedural unconscionability, so it’s unclear how much traction this type of argument will get in other cases. Cases poking holes in forum selection and arbitration clauses have focused on both. (See, e.g., Bragg v. Linden Research, Inc., 487 F. Supp. 2d 593 (E.D. Pa. 2007).) Concepcion just speaks to arbitration clauses so there’s still some room for consumer plaintiffs to argue unconscionability if they are presented with an extreme set of terms (e.g., terms that are on-sided as to forum, costs, disclaimers). It will be interesting to see how courts resolve these arguments and whether consumer plaintiffs are able to use these as an end run around Concepcion. I think this is an important unresolved question at this point, and would caution against loading up online terms with overly one-sided provisions in response to Concepcion.

Zynga has to be happy about this ruling. As a result of invoking the arbitration clause, it got the plaintiff to dismiss her claims with prejudice against Zynga.

Previous related posts:

* Second Life Forum Selection Clause Upheld–Evans v. Linden

* Another Ruling Challenging “Check the Website for Amendments” Contract Provisions–Roling v. E*Trade

* Stop Saying “We Can Amend This Agreement Whenever We Want”!–Harris v. Blockbuster

* Clickthrough Agreement With Acknowledgement Checkbox Enforced–Scherillo v. Dun & Bradstreet

* Ninth Circuit Strikes Down Contract Amendment Without Notice–Douglas v. Talk America

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Eric’s Comments

As this case illustrates, the Supreme Court’s Concepcion decision could be a potential game-changer for online user agreements. Even so, I believe that today’s best practices are:

1) A mandatory non-leaky clickthrough formation procedure.

2) Mandatory venue in vendor’s home court with an arbitration option. See the discussion in Evans v. Linden.

3) No use of arbitration as a waiver of class action rights. Concepcion suggests that more aggressive arbitration clauses, including those that preclude consolidated arbitration, might work. This would be terrific news for vendors if true, but I’ll believe it when I see more rulings than this one, especially given that this court basically punted on unconscionability. There are strong public policy norms working against an arbitration clause or other contract provision that prevents class formation.

4) Contract amendments take effect only when users are actually given notice of the amendment. See the Ninth Circuit’s Douglas case for the minimum steps required. An opt-in is legally stronger but has a number of procedural problems.

5) Irrespective of the contract language, users are in fact given actual notice of any amendments.

Zynga may have cut corners on some of these fronts but got a favorable bounce in court. Kudos to them and their lawyers. Still, based on the precedents, I wouldn’t anticipate the next defendant with identical facts will be so fortunate. Because of the low odds of a repeat victory, I don’t recommend any changes to the best practices based on this opinion.

This opinion deals with contract formation for Facebook apps, and its reasoning could extend to Facebook Connect as well (which has a different UI, I believe). (I vaguely recall a prior case on contract formation via Facebook Connect before but now I can’t remember it–any help?) The opinion provides some reason for optimism about contract formation procedures by the many apps/websites who rely on Facebook’s existing user registrations instead of creating direct user account registrations. In this case, notice that the dialog box apparently treated an “allow” as “yes” to four different issues–if the user wanted to proceed, if the user wanted Facebook to transfer its info to YoVille, if the user agreed to the applicability of Facebook’s TOS, and if the user agreed to the YoVille user agreement. That’s a lot of work from one dialog box acting as an interstitial to the user’s destination. This court gives the participating app effectively a free pass, saying:

Zynga persuasively counters that the dialogue box in question is Facebook’s standard dialogue box presented to users wishing to access any number of Facebook applications, and Zynga followed the norm for Facebook applications and was not attempting to hide its terms of service.

(An aside: I’ve always been troubled by Facebook Connect because participating websites put Facebook in total control of their user relationships. Should Facebook’s winds shift capriciously, Facebook could easily lock out the participating website’s entire registered userbase. After-the-fact antitrust claims won’t resuscitate the dead businesses. Websites, listen carefully: if you put all of your registered user eggs in the Facebook Connect basket, you may get a jumpstart on your registered users but don’t expect my sympathy if all the eggs break.)

An unfortunate collateral consequence of this ruling and the resulting Zynga dismissal: with Zynga out of the case, we may not get any further clarification to fix the troubling Swift v. Zynga ruling on 47 USC 230. AdKnowledge (which the opinion repeatedly spell-check corrected into “Acknowledge”–whoops) is still a defendant in this case, so perhaps they will push 47 USC 230 further. Otherwise, we’ll just cross our fingers that the prior 230 ruling is an aberration that most other judges will smartly ignore or distinguish.